9/16/2003 @ 1:10PM

Chang's Law

The chief executive and founder of
Taiwan Semiconductor Manufacturing
, Taiwan’s leading contract-chip manufacturer, or “foundry,” has a unique viewpoint on the health of the chip industry.

Taiwan Semiconductor Manufacturing
His company builds chips for those who can’t afford to build their own $3 billion factory, or “fab.” It’s also the biggest foundry company the world, ahead of rival
United Microelectronics
,
Chartered Semiconductor
and
IBM
.

While he sees an end to the downturn that has deeply rattled the chip business over the last three years, the news for the future isn’t all rosy. In a keynote address at the Semiconductor Industry Outlook 2003 conference, held here Sept. 15, he outlined six “mega-trends” for the chip industry.

The good news: “There are still plenty of ‘killer apps’ left for semiconductors,” he says. He sees opportunities in the areas of broadband, sensors and wireless applications.

But that’s against the backdrop of a troubling trend. Semiconductor content in electronic equipment is saturated. During the 1980s, the average semiconductor content for electronic gear was only 5%. Over time, that increased, reaching a peak of 21% in 2000. Now that number is beginning to recede, dropping to 18% in 2001 and 19% last year. Chang says 20% is a saturation point that will ultimately cause slower chip industry growth in the future.

Then there’s the matter of keeping up with Moore’s Law, one of the philosophical underpinnings of the chip business. Attributed to
Intel
co-founder
Gordon
Moore
Gordon Moore
, it states generally that the number of transistors on a chip–and hence its computing power–doubles every 18 to 24 months. But lately chip designers have had trouble staying on course with Moore’s Law. Feature sizes are so small that the physical properties of the chip itself are starting to resist shrinking further.

Chang’s Law suggests that the economic barriers are far too high for Moore’s Law to continue. It takes $30 million to design a complex chip with feature sizes of 90 nanometers, he says. Building and outfitting the fab to make it takes $3 billion, which should in turn produce $6 billion in revenue. The list of companies that can take on that level of capital expenditure grows shorter by the year.

“Moore’s Law has to slow down,” Chang says. “Very few people can afford to make or design those chips anymore.”

He still thinks the business works in the five-year cycles that have punctuated the chip industry for 40 years. While the 1980s saw a glut of manufacturing capacity from Japan and the 1990s saw it again from South Korea and Taiwan, the next capacity recession will likely hit by 2005 and come from China, Chang says.

“Taiwan has become the dominant foundry country and the second most important design country after the U.S.,” Chang says. That journey began when U.S. chip companies opened assembly plants there to take advantage of cheap labor. In the 1990s, design centers started cropping up in Taiwan. Now there are 300 chip design houses in Taiwan with combined sales of $23 billion, he says.

“China will go on the same journey that Taiwan started 30 years ago,” Chang says. He expects China to become an increasingly important force in the global chip industry, both as a market and as a manufacturing and design center. China currently accounts for some 12% of the semiconductor consumption market. In less than ten years, says Chang, it could reach 20%. China already has more than 500 chip design outfits with combined sales of $1.9 billion.

China also offers a vast potential market with a deep reserve of inexpensive labor. But it lacks, Chang says, sufficient numbers of potential employees with management and marketing skills. Those people, he says, might come from Taiwan, while the U.S. and Europe could provide technology.

Chang already has plans for TSM in China. It has received phase one approval from the Taiwan government for a fab in Shanghai and is awaiting approval for a second phase, he says.

But before that happens, enjoy the recovery. Chang expects this year’s chip sales to grow 11% over 2002. And sales in 2004 should grow 17% above 2003. Thankfully, the 2005 slowdown will not be nearly as severe as the one that began in 2000. “That was a catastrophe,” says Chang. A catastrophe that, thankfully, is in the past.